Doing Business in Saudi Arabia

109 Pages·2014·1.02 MB·English

Doing Business in Saudi Arabia: 2014

Country Commercial Guide for U.S. Companies
INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF
STATE, 2010. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES.
Chapter 1: Doing Business In Saudi Arabia …
Chapter 2: Political and Economic Environment
Chapter 3: Selling U.S. Products and Services
Chapter 4: Leading Sectors for U.S. Export and Investment
Chapter 5: Trade Regulations, Customs and Standards
Chapter 6: Investment Climate
Chapter 7: Trade and Project Financing
Chapter 8: Business Travel
Chapter 9: Contacts, Market Research and Trade Events
Chapter 10: Guide to Our Services
Return to table of contents
Chapter 1: Doing Business In Saudi Arabia
Market Overview
Market Challenges
Market Opportunities
Market Entry Strategy

Market Overview Return to top
Market:

The Kingdom of Saudi Arabia is the only country in the Middle East region that is a member of the G-
20 group of major economies. Saudi Arabia is the 9th largest trading partner of the United States with
bilateral trade of $71 billion in 2013 and also the 19th largest destination for U.S. exports. In 2013,
U.S. exports to Saudi Arabia exceeded $19 billion, an increase of 6 percent from 2012. The Saudi
economy—the largest in the Middle East and North Africa region—has been growing at a robust
pace. The private sector has been the key driver behind the stronger non-oil sector growth, with an
annual growth rate close to seven percent since 2000. The private sector is expected to continue to
be a driver of non-oil growth. The country has benefitted enormously from oil and gas reserves that
have generated vast financial liquidity in the six years between 2006 and 2013. As a result, there are
currently $960 billion worth of projects planned or under way in Saudi Arabia. Of these, more than
$700 billion are megaprojects, or large master planned developments of more than $1 billion, making
Saudi Arabia the biggest opportunity in the region for businesses involved in the infrastructure and
construction sectors. The revenues from hydrocarbon resources are expected to be sufficient to
support planned development spending and support private sector growth. The Kingdom’s budget of
$228 billion for 2014 still represents an all-time high for the Kingdom. Most of the public funds are
earmarked for social projects and improving infrastructure. Nearly $142 billion will be spent on
infrastructure related projects. The majority of these projects will focus on municipal services,
transportation, telecommunications, water, agriculture, and other pertinent infrastructure related
projects. A key investment objective in Saudi Arabia is in the area of education and training. The
Kingdom has allocated $54 billion in the budget for education and training. Education accounts for
24% of the overall budget.

Economy:

Saudi Arabia’s economy continues to expand at a healthy pace, with real GDP growth of 3.8% for
CY2013, and inflation at 3.4% at the end of 2013. Oil revenues through Saudi Aramco accounted for
85% of the Saudi Arabian government’s (SAG’s) current account receipts, and approximately 86% of
total export revenue in 2013. Despite overspending its budget by 12.8%, the Kingdom enjoyed a
fiscal surplus of 7.4% of GDP in 2013. The Kingdom holds foreign-exchange reserves estimated at
around $730 billion and is one of the least indebted countries in the world.

The Saudi Arabian Government’s (SAG) budget continues to exhibit high spending on infrastructure
and social programs. For 2014, the SAG has forecast outlays of SAR 855 billion, which reflects a 4%
increase vis-à-vis the previous year. Public spending and improving the investment climate continues
to be an important part of the SAG's broader program to liberalize the country's trade and investment
regime, diversify an economy overly dependent on oil, and promote employment for a young and
growing population. The government encourages investment in transportation, education, health,
information and communications technology, life sciences, and energy; as well as in four "Economic
Cities" that are at various stages of development. The Economic Cities are to be new,
comprehensive developments in different regions focusing on particular industries. For the longer
term, Saudi Arabia seeks to also develop into a regional hub in the life sciences, food processing, and
automotive manufacturing industry sectors.
Market Challenges Return to top
Inflation: Saudi inflation dropped to 2.6 year-on-year in March 2014. However, as Saudization
and increased local labor expense added with possible subsidy reform inflation could move higher.

Commercial Disputes Settlements: The enforcement of foreign arbitration awards for private
sector disputes has yet to be upheld in practice. Furthermore, government agencies are not
allowed to agree to international arbitration without approval from the Council of Ministers, which is
rarely granted.

Business Visas: All visitors to Saudi Arabia must have a Saudi sponsor in order to obtain a
business visa to enter Saudi Arabia. On the positive side, in May 2008, the United States and Saudi
Arabia signed an agreement to grant reciprocal 5-year, multiple-entry visas for business travelers.
This agreement represents a significant step forward in the visa process.

Intellectual Property Protection: Intellectual property protection has steadily increased in the
Kingdom. Over the last seven years, Saudi Arabia has comprehensively revised its laws covering
intellectual property rights to bring them in line with the WTO agreement on Trade- Related Aspects
of Intellectual Property Rights (TRIPs). The Saudi Government undertook the revisions as part of
Saudi Arabia’s accession to the WTO, and promulgated them in coordination with the World
Intellectual Property Organization (WIPO). The Saudi Government updated its Trademark Law
(2002), Copyright Law (2003), and Patent Law (2004), with the dual goals of TRIPs-compliance and
effective deterrence against violators. In 2008 the Violations Review Committee created a website
and has populated it with information on current cases. The patent office continues to build its
capacity through training, has streamlined its procedures, hired more staff, and reduced its backlog.

In September 2009, the King approved a mechanism to protect Exclusive Marketing Rights (EMR)
for certain pharmaceutical products which lost patent protection when Saudi Arabia transitioned to a
new TRIPS-compliant patent law in 2004. The Saudi Ministerial Council in December 2009
approved the Kingdom’s accession to both the Intellectual Property Owners Association Patent
Cooperation Treaty (PCT) and its Implementing Regulations and the Patent Law Treaty (PLT)
adopted by the Diplomatic Conference in Geneva on June 1, 2000. The Council of Ministers issued
a resolution on 23/11/1428H (December 3, 2007) approving the Law of Trademarks for GCC
countries.

Counterfeiting: Although anti-counterfeiting laws exist, manufacturers of consumer products and
automobile spare parts are particularly concerned about the availability of counterfeit products in
Saudi Arabia. The Saudi Government remains committed to stopping counterfeit products from
entering into the country.

Standards and labeling: As part of the GCC Customs Union, the six Member States are working
toward unifying their standards and conformity assessment systems. However, each Member State
continues to apply its own standard or a GCC standard. The Government of Saudi Arabia mandates
that a Certificate of Conformity must accompany all consumer goods exported to Saudi Arabia.
Labeling and marking requirements are compulsory for any products exported to Saudi Arabia.
Industrial standards and conformity assessment remains the most significant trade issue affecting
U.S. manufacturers.

Travel Advisories: Americans visiting Saudi Arabia are advised to check the U.S. State
Department’s website at http://travel.state.gov for the latest information on travel to Saudi Arabia.
Market Opportunities Return to top
Saudi Arabia, the construction leader in the Gulf area, has budgeted US$385 billion on roads,
airports and energy projects for the five-year period from 2010 to 2014. The government continues
to make significant investments in construction. Major rail and airport expansion projects are also
under way.

Saudi Arabia has the largest IT market in the Gulf region, project at approximately USD4.6 billion.
Particularly important growth sectors would be in the areas of cyber security, smart grid, and
command/control of major infrastructure utilizing geospatial IT systems..

Saudi Arabia’s ambitious rail plans are fuelling activity in the infrastructure sector, with USD 30
billion worth of contracts under way or at the bidding stage. Major projects include the North-South
railway, the Saudi Land Bridge, and the Mecca-Medina railway. In addition to both light rail and
heavy rail, Saudi Arabia also seeks to expand intermodal connectivity of various transportation
modes including maritime shipping, buses, rail, and air travel (airport expansion).

Saudi Arabia is the third largest consumer of water per capita in the world, but has limited
groundwater to tap. Desalination forms the backbone of the government’s water strategy. The
Saudi government has committed USD 6bn a year to bolstering the water sector over the next two
decades.

The state-owned utility Saudi Electricity Company (SEC) intends to invest USD 70 billion by 2018 to
add 22MW to the nation’s power-generating capacity in order to meet the growing demand from a
rapidly increasing population. SEC’s goal is to reach a power- generation capacity of 65,000 MW by
the end of the year 2018.

Over the long term, Saudi Arabia is expanding minerals mining and diversification of downstream
petrochemicals in order to develop a strong manufacturing base for whole automobiles, electronics,
and life science technologies. The purpose of which is to create highly technical and highly paid jobs
for Saudi nationals
Market Entry Strategy Return to top
Although American exporters are not required to appoint a local Saudi agent or distributor to sell to
Saudi companies, we strongly recommend that all new-to-market U.S. companies consider
partnering with a local company. For complete information and regulations on registering a business
in Saudi Arabia, please visit the Saudi Arabia Government Investment Agency (SAGIA) at
http://www.sagia.gov.sa/
Although the Saudi Government encourages foreign investment, a U.S. firm is strongly
encouraged to seek in-country legal counsel on the best approach. The U.S. Commercial Service
can assist by providing a list of local attorneys, which may be associated with American law firms.

The U.S. Department of Commerce in Saudi Arabia assists U.S. exporters and service companies
to identify market opportunity, business partners, and are regularly advocating greater
transparency in commercial matters relating to industry standards, commercial rule of law, and
public procurement.

Return to table of contents
Return to table of contents
Chapter 2: Political and Economic Environment
For background information on the political and economic environment of the country, please click on
the link below to the U.S. Department of State Background Notes.

http://www.state.gov/r/pa/ei/bgn/3584.htm

Return to table of contents
Return to table of contents
Chapter 3: Selling U.S. Products and Services
Using an Agent or Distributor
Establishing an Office
Franchising
Direct Marketing
Joint Ventures/Licensing
Selling to the Government
Distribution and Sales Channels
Selling Factors/Techniques
Electronic Commerce
Trade Promotion and Advertising
Pricing
Sales Service/Customer Support
Protecting Your Intellectual Property
Due Diligence
Local Professional Services
Web Resources

Using an Agent or Distributor Return to top
American exporters are not required to appoint a local Saudi agent or distributor to sell to Saudi
companies, but commercial regulations restrict importing for resale and direct commercial marketing
within the Kingdom to Saudi nationals, wholly Saudi-owned companies, and Saudi-foreign
partnerships where the foreign partner holds 25% equity. Nationals from the Gulf Cooperation Council
(GCC) countries, which include Saudi Arabia, Kuwait, Qatar, Oman, Bahrain, and the UAE, are also
allowed to engage in trading and retail activities, including real estate. Agent/distributor relations are
governed by the Commercial Agency Regulations of the Kingdom of Saudi Arabia that is
administered by the Ministry of Commerce and Industry. Saudi business people cannot act as
commercial agents unless their names are entered into the Register maintained by the Ministry of
Commerce and Industry.

In July 2001, the Council of Ministers cancelled a decree compelling foreign companies with
government contracts to appoint a Saudi service agent. The old decree also specified a maximum
commission of 5%. Some government contracts, however, still require a minimum participation by a
Saudi entity. In addition, government contracts typically include a clause requiring training programs
for Saudis. Even though it is no longer legally required, we recommend that U.S. companies seeking
to do business with Saudi government agencies appoint a Saudi service agent. The sales
commission paid to the Saudi service agent is justified by the relatively quick and easy access to the
appropriate government decision-maker. The U.S. Commercial Service in Saudi Arabia can help U.S.
companies find a reputable Saudi account executive (service agent).

Sales commissions are entirely negotiable between the U.S. party and the Saudi agent or distributor,
but typically range from 3 to 10 percent, depending on the product or service and the duties required
of the service agent. Whether or not sales commissions are to be paid, and the percentage thereof,
should carefully be spelled out in any agency or distribution contract.

Terminating an agent/distributor agreement can be difficult even though Saudi policy has changed to
permit registration of a new agreement over the objections of the existing distributor. While most
prospective Saudi agents and/or distributors generally prefer exclusive agency contracts, these are
by no means required. Given the close-knit nature of business circles in Saudi Arabia, replacing an
agent or distributor could damage a U.S. firm’s reputation if not handled sensitively.
A U.S. company should at all costs avoid being viewed as lacking adequate commitment to its Saudi
business relationships. Saudi agents may request “parting compensation” in the event the foreign
exporter decides to dissolve a business relationship. Since this is a common practice in this market,
U.S. companies should address this eventuality prior to executing a contract.

U.S. firms interested in the Saudi market are cautioned against trying to use lists of importers for
“cold calls” on prospective agents. Saudis prefer to do business with someone only when they have
been properly introduced and have met face-to-face. To help dispel reluctance on the Saudi side, an
introduction by a “go-between” typically serves to vouch for the reliability of both parties. The U.S.
Commercial Service in Saudi Arabia performs just this sort of introduction for U.S. companies as part
of its “Gold Key” matching service (available to U.S. companies exclusively). Other appropriate third
parties for such introductions include other Saudi firms, U.S. companies that have successfully done
business in Saudi Arabia, banks, trade associations, and chambers of commerce.

The Saudi legal system, known as Shari’a, is based on the Koran and Hadith and differs
considerably from U.S. practice. The Saudi Government has earmarked nearly $2 billion to overhaul
its judicial system and court facilities in an effort to streamline the legal process. Royal Decree M/78
dated October 1, 2007, approved the Charter of the Judiciary System and the Charter of the Board of
Grievances, and implemented relevant mechanisms.

American firms contemplating an agency or distribution agreement are strongly urged to consult with
a local attorney and have a legally binding contract drawn up, setting forth in detail the rights and
obligations of all parties, how and when sales commissions are to be paid, and how and in what
venue any disputes are to be settled. A list of local law firms is available on the website of the U.S.
Embassy in Riyadh, Saudi Arabia.

The U.S. Commercial Service, through its domestic U.S. Export Assistance Centers and overseas
offices in Embassies and Consulates, offers a variety of services to assist American firms in selecting
a reputable and qualified representative. In Saudi Arabia, the U.S. Commercial Service maintains
offices in the capital, Riyadh, and in the regional business centers of Jeddah and Dhahran. CS Saudi
Arabia’s Gold Key Matching Service is a personalized and targeted matchmaking service that
combines an orientation briefing, a profile of each Saudi prospect, interpreter services for meetings, a
Commercial Specialist from the Embassy to escort you to your meetings, and assistance in
developing follow-up strategies. The International Company Profile provides background information
on potential partners. These services are available to U.S. companies exclusively.
Establishing an Office Return to top
The procedures to establish an office in Saudi Arabia differ according to the type of business
undertaken. The most common and direct method is simply to appoint an agent/distributor who can
set up the office under its own commercial registry. The agent/distributor agreement should be
registered with the Ministry of Commerce & Industry. The Commercial Agency regulations govern the
agent/distributor agreement.

Technical and Scientific Service Office: The office requires a license from the Ministry of
Commerce and Industry. This approach preserves the independence and identity of the foreign
company and provides for more leeway in managing and marketing the company’s products or
services. Technical and scientific service offices are not allowed to engage directly or indirectly in
commercial activities, but they may provide technical and advisory support to Saudi distributors, as
well as conduct market surveys and product research.
Branch Office: Saudi Arabia’s Foreign Investment Law allows international companies the possibility
of 100% ownership of projects and property required for the project itself, while enabling them to
retain the same incentives given to national companies. A branch office involves a more direct
presence than a commercial agent. Branch offices are largely restricted to an administrative role and
may not engage in trading activities. Nevertheless, a branch office can be very useful as a liaison
presence for a U.S. company. A branch office offers the benefits of a physical presence without the
formal requirements of a joint venture company. An U.S. company can open an independent branch
office without a Saudi partner. Its parent company must accept full responsibility for all work
undertaken by the branch office in Saudi Arabia.

Independent Office: To establish an office in Saudi Arabia, a foreign company needs to submit to
related Saudi authorities a copy of its articles of association as incorporated in the country of origin, a
copy of its commercial registration, a written approval by the board of directors of the company, its
chief executive officer/president or a similar entity related to their decision to open a subsidiary office
stating the name of the city and the name of the subsidiary’s manager. All aforementioned documents
are to be attested as required. The authorization to the applicant has to be attested by the Saudi
Embassy in Washington, D.C.

Liaison Office: A liaison office is normally granted only for companies that have multiple contracts
with the Government and require a local office to oversee contract implementation. Representative
offices are not allowed to engage in direct or indirect commercial activity in the Kingdom. Founding a
business establishment requires a license from the Ministry of Commerce and Industry.

Joint Venture: A company can establish a joint venture with a Saudi firm. Usually, the Saudi
business community refers to limited liability partnerships as joint ventures. These partnerships must
be also registered with the Ministry of Commerce and Industry and the partners’ liabilities are limited
to the extent of their investment in the partnership.

Finally, foreign companies can get a license from the Saudi Arabian General Investment Authority
(SAGIA) to set up an industrial or a non-industrial project in Saudi Arabia. SAGIA will license projects
under the new Foreign Investment Act, which allows for 100% foreign ownership. In addition, foreign
investors can open a sales/administration/ marketing office to complement their industrial or non-
industrial project. SAGIA has a broad mandate on all matters relating to foreign investments in
industry, services, agriculture, and contracting.

The Companies Law is the principal body of legislation governing companies. Saudi company law
recognizes eight forms of companies. The most common forms are limited- liability companies (LLC),
joint stock companies, general partnerships and limited partnerships. The less common company
forms are partnerships limited by shares and joint ventures. Apart from the above, Shari’a law
specifies a number of other types of companies, which cannot, however, be used by foreign investors.
In practice, foreign companies usually establish LLCs. Partnerships and joint stock companies are
only established in exceptional cases.

LLCs are a popular corporate vehicle among foreign investors in Saudi Arabia because they are
simple to establish and administer and the personal liability of each of the partners is limited to the
individual partner’s contribution to the company’s share capital.

Costs of doing business in Saudi Arabia are substantially lower than those in the West. Commercial
and industrial rents average is $5.33 to $26.67 per square meter per year. The rate is much lower in
industrial cities, where it is at $0.021 per square meter per year. Rentals for residential
accommodation can vary immensely depending on location and quality of housing. With respect to
utilities, electricity costs are at $0.027 per KwH for industrial use. Water costs range from $0.027 to
$1.6 per cubic meter depending on the number of bands. Employee costs vary based on the
employee’s status, position, and relevant experience.

Franchising Return to top
Franchising is an increasingly popular approach to establish consumer-oriented businesses in Saudi
Arabia. Although the franchise market is small compared to that in the United States, it is rapidly
expanding in a variety of business sectors. According to a local study, the Saudi franchise market is
expected to grow an average of 10-12% annually over the next three years. The same study projects
the value of paid fees and royalties at more than SR 1.2 billion ($323 million). The growth in this
sector is based on Saudis’ desire to own their own business and a widely held appreciation for
Western methods of conducting business. American franchises dominate the market and more U.S.
brands have recently obtained a foothold here, including Gap, Krispy Kreme, TGIF and Curves.
American companies face growing competition from local and foreign companies in the following
sectors: car rental agencies, fast food and business services. Franchising opportunities are known to
exist in many business categories, including apparel, laundry and dry cleaning services, automotive
parts and servicing, restaurants, mail and package services, printing, and convenience stores. There
are more than 300 foreign companies that have founded franchises in Saudi Arabia.

To establish a franchise in Saudi Arabia, a foreign franchisor must select a franchisee and register the
franchise. The franchisor must be the original one, and may not be a third-country franchisor. All
franchise agreements follow the Saudi Commercial Law and must be approved by the Ministry of
Commerce and Industry. A foreign company is strongly urged to consult with an attorney familiar with
Saudi law before establishing, changing, or terminating a franchise agreement.

Direct Marketing Return to top
Direct marketing is not widely used in Saudi Arabia. Personal relations between vendors and
customers play a more important role than in the West. Furthermore, many forms of direct marketing
practiced in the United States are unacceptable due to Islamic precepts regarding gender segregation
and privacy at home. Limitations in the Saudi postal system are also a constraint. Nevertheless, a
new, yet comparatively expensive mail delivery system was launched, called Wasel, which delivers
mail and parcels to residences. The Saudi Post set up a company named Naqel, which is a joint
project with the private sector and aims to upgrade Saudi Post’s competitive capabilities and develop
its services.

Direct marketing has been conducted on a very limited basis using unsolicited mail campaigns and
fax, catalog sales (with local pick-up or delivery arranged), and commercials on satellite television
providing consumers with a local telephone number to arrange delivery. Extensive consumer surveys
are being undertaken, mainly on behalf of multi-national manufacturers and particularly in the
consumer goods sector.